Fonterra Co-operative Council chairman John Stevenson said while farmers may be pleased with Monday’s announcement thattheir co-operative would make a “significant” capital return to shareholders if the $3 billion-plus business is divested, a lot more needed be understood about the impact on the overall business in the medium and long term.
Since Fonterra’s May announcement it was assessing a full or partial sale of the business which includes its integrated New Zealand-Australia business Fonterra Oceania, home to brands including Anchor, Mainland, Kāpiti, Anlene, Anmum, Fernleaf, Western Star, and Perfect Italiano, a main theme has emerged in shareholders’ questions: “What will our co-operative look like after a sale?”
The Herald has put that question to chairman Peter McBride who said it was too early to have that discussion. He reiterated this last week at the time of Fonterra’s FY24 financial results, saying any sale was months away. But he said New Zealand’s biggest business may share more information before Christmas. Fonterra’s annual meeting is in November.
The dairy manufacturer and exporter returned $800 million or 50c/share to shareholders last year after the sale of its South American consumer and manufacturing business Soprole.
Stevenson said the farmer-elected council would ensure co-op members were fully informed on “what this proposed change means for them and so they are not unduly influenced by the prospect of a strong capital return”.
Fonterra Co-operative Council chairman John Stevenson says the divestment plan is a “bold move”. Image / Supplied
Fonterra will ask its 7800 farmer-shareholders to vote in support of a sale if the board decides to take that path.
One Fonterra shareholder was less than impressed with the announcement of a capital return, telling the Herald “it’s farmers’ money anyway”. He told the Herald it was “disappointing” Fonterra could not make a success of the consumer business, but given it couldn’t, a sale seemed logical.
He said older farmers he had spoken to were particularly disappointed because some of the brands had a long legacy in the New Zealand dairy industry.
Meanwhile, the council also has work to do digesting Fonterra’s revised business strategy, announced on Monday, Stevenson said.
“At a headline level, council felt it was aspirational. Fonterra are looking to return more to farmers as well as invest more. We need to understand in more detail how the business is going to do that.
“We’re seeing the capex envelope go from an average of $650 million to $1 billion-plus. That’s a material investment of farmers’ money. We’ve indicated we’ll be looking for more detail on that.”
The council would be taking shareholders’ questions and feedback from national meetings this week to the Fonterra board “and seeking any further explanation of the details of the strategy our farmers want us to”.
Fonterra on Monday said it would deepen its focus on its high-performing ingredients and food-service businesses. This followed a strategic review this year that confirmed its strengths as a business-to-business dairy nutrition provider, and resulted in the current exploration of divestment options for the consumer business.
Chairman Peter McBride said the revised strategy created a pathway to greater value creation, allowing the co-op to announce enhanced financial targets and policy settings.
“We have increased our target average return on capital to 10-12%, up from 9-10%, and announced a new dividend policy of 60-80% of earnings, up from 40-60%. At all times, we remain committed to maintaining the maximum sustainable farmgate milk price.”
Chief executive Miles Hurrell said Fonterra was in a strong position, delivering results well above its five-year average, which put it in a position to think about the next evolution of its strategic delivery.
“The foundations of our strategy – our focus on New Zealand milk, sustainability, and dairy innovation and science – remain unchanged. What’s changed is how we play to these strengths.”
Fonterra said it had made six strategic choices for the next decade and beyond.
First, it would work alongside farmers to enable on-farm profitability and productivity and support the strongest payout.
Second, it planned to deepen its position as a world-leading provider of sophisticated dairy ingredients and build trading capability to grow the farmgate milk price and earnings.
Third, it aimed to expand its food-service business in China and other key markets.
Fourth, it aimed to invest in an efficient manufacturing and supply chain network to improve its flexibility to allocate milk to the highest-returning product and sales channel.
Fifth, it said it would improve the co-op’s sustainability credentials and strengthen partnerships with customers who valued sustainability.
Sixth, it aimed to use science and technology to build on its competitive advantages.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.
